No Tax on Overtime: What Actually Got Passed

The One Big Beautiful Bill Act, signed in July 2025, created a new deduction (Internal Revenue Code section 225) for "qualified overtime compensation." It applies to tax years 2025 through 2028 and is claimed on Schedule 1-A, a new form the IRS built specifically for this deduction and its three siblings: the tips deduction, the car loan interest deduction, and the $6,000 senior deduction. All four share the same 2025-2028 window.

Three design choices matter. First, you get the deduction on top of the standard deduction; you do not have to itemize. Second, it reduces taxable income but not adjusted gross income, so it does not help you qualify for other AGI-based breaks. Third, it only touches federal income tax. Payroll taxes and, in most states, state income taxes still apply in full.

Here is the whole mechanism in one sentence: your employer reports how much qualified overtime premium you were paid, you deduct that number (up to the cap) on your return, and your taxable income drops by that amount. The cash value equals the deduction times your marginal rate. A $4,000 deduction is worth about $880 to someone in the 22% bracket and about $480 in the 12% bracket. It is a real benefit, just a much smaller one than "no tax on overtime" sounds like.

Enter your regular hourly rate, typical overtime hours, filing status, and approximate income. The calculator applies the half-rate premium rule, the cap, and the phase-out, then values the deduction at your estimated 2026 federal bracket.

The statute keys off one specific law: section 7 of the Fair Labor Standards Act, the federal rule that requires time-and-a-half after 40 hours in a workweek for non-exempt employees. Qualified overtime compensation is the amount that FLSA-required overtime pays you above your regular rate. Overtime that exists only because of a state law, a union contract, or employer generosity does not qualify, and neither does any overtime paid to a worker the FLSA does not cover.

A concrete week: you earn $30 an hour and work 50 hours. Hours 41 through 50 pay $45 each, or $450 of overtime pay. The regular-rate portion of those hours ($300) is ordinary taxable wages. The premium portion ($150) is what counts toward the deduction. Over a year of similar weeks, roughly 48 weeks with 10 overtime hours each, the qualified premium is about $7,200. In the 22% bracket that deduction is worth roughly $1,580 of federal tax. Real money; not a tax-free year of overtime.

Watch the edges. If your employer pays double time, the FLSA still only requires time-and-a-half, so only the 0.5x slice qualifies; the extra 0.5x above that is just taxable pay. If you work in a state with daily overtime rules that the FLSA does not impose, those daily-overtime premiums do not count unless the same hours also trigger FLSA overtime. The test is always "what did federal law force," not "what did my pay stub say."

The deduction tops out at $12,500 per year, or $25,000 on a joint return. Above $150,000 of modified adjusted gross income ($300,000 joint), the cap shrinks by $100 for every $1,000 of income over the line. Run that arithmetic out and a single filer loses the last dollar of deduction at $275,000 of MAGI; a joint return loses it at $550,000.

Two quirks worth knowing. Married couples must file jointly to claim the deduction at all; married filing separately is locked out. And the person claiming it needs a Social Security number valid for employment on the return. Also note what the phase-out runs on: MAGI, which includes the overtime itself. A big overtime year can push you into the phase-out that trims the deduction on that same overtime.

This is where the slogan and the statute part ways hardest. Overtime is still wages. Your employer still withholds Social Security and Medicare taxes on all of it, still withholds income tax under the normal tables, and still reports it as taxable wages. The deduction happens later, on your return. For 2025 the IRS explicitly kept withholding tables unchanged, which is why nobody's paycheck grew when the law passed. If you want the FICA piece of your pay stub decoded line by line, our what is FICA guide covers exactly what those 7.65% withholdings fund and why no deduction touches them.

On reporting: employers are required to tell the IRS (and you) how much qualified overtime you were paid. For 2025, the first, messy year, W-2 forms were unchanged and employers could note the amount in box 14 or a separate statement, with taxpayers allowed to use any reasonable method to figure their qualified premium. Starting with 2026 W-2s, qualified overtime gets its own dedicated reporting, so the number you deduct should come straight off the form.

Practical takeaway for anyone banking overtime money: treat the deduction as a filing-season bonus, not a raise. If you count on the savings during the year, you can adjust your W-4 withholding, but do it with the phase-out math in hand so you do not under-withhold your way into a penalty.

1. Self-employed and 1099 workers get nothing.

The FLSA's overtime mandate applies to employees, not independent contractors. A contractor billing 60 hours a week has zero qualified overtime, full stop. If you are self-employed, your tax planning runs through a different set of levers entirely; start with our self-employment tax calculator to see what you actually owe before chasing deductions that do not apply to you. And be wary of any pitch to "convert" employees to contractors or restructure pay around this deduction; misclassification penalties dwarf the tax benefit.

2. Exempt salaried workers are outside the fence.

No FLSA overtime entitlement means no deduction. A salaried manager who works 55-hour weeks with no overtime pay has nothing to deduct, and a salaried worker whose employer voluntarily pays extra for long weeks still fails the test because the FLSA did not require the payment.

3. The deduction is temporary, and spending decisions should know that.

The provision expires after 2028 unless Congress extends it. If picking up extra shifts pencils out only because of the tax break, re-run the numbers at full freight, because that is the default future.